[The European Union’s power sector is an example of what market
fundamentalism has done to electricity networks. With the end of cheap
natural gas, retail consumers and businesses are paying the price for
their governments’ embrace of a shoddy theory.]
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TIME TO BLOW UP ELECTRICITY MARKETS  
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Yanis Varoufakis
August 29, 2022
Project Syndicate
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_ The European Union’s power sector is an example of what market
fundamentalism has done to electricity networks. With the end of cheap
natural gas, retail consumers and businesses are paying the price for
their governments’ embrace of a shoddy theory. _

, Sean Gallup/Getty Images

 

ATHENS – The blades of the wind turbines on the mountain range
opposite my window are turning especially energetically today. Last
night’s storm has abated but high winds continue, contributing extra
kilowatts to the electricity grid at precisely zero additional cost
(or marginal cost, in the language of the economists). But the people
struggling to make ends meet during a dreadful cost-of-living crisis
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kilowatts as if they were produced by the most expensive liquefied
natural gas transported to Greece’s shores from Texas. This
absurdity, which prevails well beyond Greece and Europe, must end.

The absurdity stems from the delusion that states can simulate a
competitive, and thus efficient, electricity market. Because only one
electricity cable enters our homes or businesses, leaving matters to
the market would lead to a perfect monopoly – an outcome that nobody
wants. But governments decided that they could simulate a competitive
market to replace the public utilities that used to generate and
distribute power. They can’t.

The European Union’s power sector is a good example of what market
fundamentalism has done to electricity networks the world over. The EU
obliged its member states to split the electricity grid from the
power-generating stations and privatize
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power stations to create new firms, which would compete with one
another to provide electricity to a new company owning the grid. This
company, in turn, would lease its cables to another host of companies
that would buy the electricity wholesale and compete among themselves
for the retail business of homes and firms. Competition among
producers would minimize the wholesale price, while competition among
retailers would ensure that final consumers benefit from low prices
and high-quality service.

Alas, none of this could be made to work in theory, let alone in
practice.

The simulated market faced contradictory imperatives: to ensure
a minimum amount
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electricity within the grid at every point in time, and to channel
investment into green energy
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The solution proposed by market fundamentalists was twofold: create
another market
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permissions to emit greenhouse gases, and introduce marginal-cost
pricing
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which meant that the wholesale price of every kilowatt should equal
that of the costliest kilowatt.

The emission-permit market was meant to motivate electricity producers
to shift to less polluting fuels. Unlike a fixed tax, the cost of
emitting a ton of carbon dioxide would be determined by the market. In
theory, the more industry relied on terrible fuels like lignite, the
larger the demand for the EU-issued emission permits. This would drive
up their price, strengthening the incentive to switch to natural gas
and, ultimately, to renewables.

Marginal-cost pricing was intended to ensure the minimum level of
electricity supply, by preventing low-cost producers from undercutting
higher-cost power companies. The prices would give low-cost producers
enough profits and reasons to invest in cheaper, less polluting energy
sources.

To see what the regulators had in mind, consider a hydroelectric power
station and a lignite-fired one. The fixed cost of building the
hydroelectric station is large but the marginal cost is zero: once
water turns its turbine, the next kilowatt the station produces costs
nothing. In contrast, the lignite-fired power station is much cheaper
to build, but the marginal cost is positive, reflecting the fixed
amount of costly lignite per kilowatt produced.

By fixing the price of every kilowatt produced hydroelectrically to be
no less than the marginal cost of producing a kilowatt using lignite,
the EU wanted to reward the hydroelectric company with a fat profit,
which, regulators hoped, would be invested in additional
renewable-energy capacity. Meanwhile, the lignite-fueled power station
would have next to no profits (as the price would just about cover its
marginal costs) and a growing bill for the permits it needed to buy in
order to pollute.

But reality was less forgiving than the theory. As the pandemic
wreaked havoc on global supply chains, the price of natural gas
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trebling after Russia invaded Ukraine. Suddenly, the most polluting
fuel
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was not the most expensive, motivating more long-term investment in
fossil fuels and infrastructure for LNG. Marginal-cost pricing helped
power companies extract huge rents from outraged retail consumers, who
realized they were paying much more than the average cost of
electricity. Not surprisingly, publics, seeing no benefits – to them
or to the environment – from the blades rotating above their heads
and spoiling their scenery, turned against wind turbines.

The rise in natural gas prices has exposed the endemic failures that
occur when a simulated market is grafted onto a natural monopoly. We
have seen it all: How easily producers could collude in fixing the
wholesale price. How their obscene profits, especially from
renewables, turned citizens against the green transition. How the
simulated market regime impeded common procurement that would have
alleviated poorer countries’ energy costs. How the retail
electricity market became a casino with companies speculating on
future electricity prices, profiting during the good times, and
demanding state bailouts when their bets turn bad.

It’s time to wind down simulated electricity markets. What we need,
instead, are public energy networks in which electricity prices
represent average costs plus a small mark-up. We need a carbon tax
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whose proceeds must compensate poorer citizens. We need a large-scale
Manhattan Project-like investment in the green technologies of the
future (such as green hydrogen and large-scale offshore floating
windfarms). And, lastly, we need municipally-owned local networks of
existing renewables (solar, wind, and batteries) that turn communities
into owners, managers, and beneficiaries of the power they need.

_YANIS VAROUFAKIS, a former finance minister of Greece, is leader of
the MeRA25 party and Professor of Economics at the University of
Athens. _

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* electric power
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* economics
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* green energy
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* Natural Gas
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* Markets
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* prices
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